Benchmarking Best Practices

by Jennifer Ulrich, Senior Project Manager

With all of the resources we have access to today, market intelligence is more readily available than ever before. The problem now is what do you do with all of that data? What are you measuring against it? What is the right data to use for a valuable benchmark? Finally, now that you have a benchmark analysis with the right data and the right baseline, what do you do next? The following article will point out some best practices addressing questions like these in an effort to ensure that your benchmarks are producing significant value for your sourcing efforts.

Let’s start with why we benchmark. Benchmarks are developed in an effort to establish a comparison between quantitative and qualitative data sets in order to understand where your business falls when aligned with other similar data sets. Keep in mind that the key there is similarity. Throughout the benchmarking process one thing that should remain consistent is having like data sets for comparative purposes. For example, if you are a mid-size organization in the finance industry with corresponding price points, it may not make sense to compare your pricing to a small or large firm in the same industry. It all depends on the type of benchmarking that you are looking to perform.

There are different types that will suit different needs. Internal benchmarking means that you are comparing one set of data to another without looking to external resources. For instance if you use multiple staffing firms to fill positions, you can compare them to each other to determine if they are competitive within your pricing and scope structures. Competitive benchmarking is when you compare your baseline data to data from a direct competitor. Using the staffing example again this would mean comparing a temporary staffing firm’s pricing and qualitative data points for your mid-size finance company to another mid-size finance company, ensuring that as many characteristics are as exact as possible. This would provide the most valuable result in terms of like comparison with external data sources. Functional benchmarking involves comparing similar data more loosely to another business in your broader industry. This is still very valuable but not as exact. Finally, a generic benchmark compares operations that are utilized across various industries. A generic benchmark may encompass comparing security services that are used by your finance company to a healthcare facility and a retail chain. Again, depending on your needs, each of these types of benchmarks can produce varying levels of value.

Gathering the right baseline data is just as important as the comparative data. First you need to establish what your goals are, cost reduction or improving service levels are two viable options. If you are focused on cost, you will need to have clear price points. For a service based supplier, this might include a recent rate card, any discount structures in place, all ancillary fees assessed, as well as clearly defined roles and responsibilities, all collected from the contract or similar documents. If your goals are more focused on process and service level improvements you should collect all current SLAs and KPIs along with a detailed scope of work that details this information clearly. All of this data collection and baseline development is vital to perform up front to ensure that the benchmark data you are collecting is viable in comparison.

Collecting the right data will depend on what type of benchmark you are looking to perform, as noted previously. Regardless, the sources for data are determined by the type of service or product you are benchmarking. Internet research is an excellent start for external data sources that are publically available. You may need to get creative in your search efforts to find some hidden gems, but it will be worth it. Remember to look to internal resources to collect data as well for similar sources. Utilizing a third party resource to assist in the benchmark development may also be an option. They often have a plethora of data points already established in a multitude of markets and industries. Not to mention they likely will have more experience performing this type of work. If this is not an option you can certainly still create a valuable benchmark analysis. The more resources you have for comparison the more thorough the benchmark will be.

Once you have established enough comparable data, which would include at least three or more comparable data sets to compare to your data, you need to complete the analysis. There are multiple ways of looking at the data. For example, when analyzing rate cards against one another your data would align in the first column, remember your data is always the basis for comparison against. When lining up rates for any product or service it is essential to ensure that you are comparing like products or services. For example, when analyzing Project Manager role between your supplier and another company’s supplier the role definition is key. A Project Manager with ten years’ experience will likely assess a higher rate than a Project Manager with two years’ experience. After the corresponding data points have been lined up there are a variety of comparisons that can be completed. A rate to rate comparison is the most basic. If you have multiple data points from the same providers you can average them to determine one comparable rate as well. You should compare your rate to the market high, low, and average overall to calculate where your rates fall within that range. When analyzing qualitative data points look for negotiable points such as service levels including penalties tied to them. KPIs used to measure those service levels should also be assessed. These are just a couple data sets that can be benchmarked, others might include discount/ rebate structures, volume commitments, allocation and utilization rates, and incentive programs, to name a few.

Finally, once you have prepared a complete benchmark analysis aligned with your goals and objectives, the next step is to apply what you have learned. If you are interested in switching providers you can perform a full sourcing initiative soliciting competitive bids and supplementing the proposal process with the benchmark you have established. Or if you are satisfied with the current provider you should collaborate with them to improve pricing and services based on the benchmark. A strategic sourcing consulting firm is also a very valuable tool in the negotiation process, aiming to alleviate this burden from your internal team and utilize their broad range of experience and expertise. Overall, regardless of what your end goal is, performing ongoing benchmarking is vital to ensuring that you are receiving best in class pricing and services from your business relationships.